President Xi’s New Silk Road

Ready for Silk Road 2.0?

The ancient network of trade routes that brought China’s spices, paper, gunpowder and, of course, silk to the West is being reshaped for the 21st century. The new routes will be over water as well as land, to accommodate the huge fleets of container ships that carry the full range of products made in modern China to Europe, Africa and beyond.

This new Silk Road represents a big, bold and expensive bet by President Xi Jinping to help revive the country’s slowing economic growth, and it has broad implications for global trade as a whole. One part of the initiative is old school—the so-called Silk Road Economic Belt roughly replicates the trade and cultural ties formed along the original overland routes that connected China to the Mediterranean. But the rest is New China, a “road” system that extends far offshore to many of the world’s major waterways. This critical piece, dubbed the 21st Century Maritime Silk Road, will involve fleets of dredges as well as container ships, and hundreds of billions of dollars in state and private financing.

THE NETWORK

The goal is to link a sprawling network of ports and logistics facilities, with the aim of soaking up China’s excess capacity in steel, construction and shipbuilding and securing new markets for its goods. Along the way, the project is also meant to redraw global trade routes and rules—and to showcase Beijing’s economic muscle.

For any company that trades with Asia—or relies on seaborne logistics at any point in its distribution, customer service or supply chain—the ripple effects of Beijing’s ambitious plans could be game-changing. The new road is already paying dividends for some Western companies, allowing them to shorten supply chains from China’s manufacturing centers—cutting distribution costs—and facilitating the development of newer markets in Central and Eastern Europe and North Africa.

When it is fully formed, the Maritime Silk Road will stretch from China’s southeastern coast, where most of the country’s industry is concentrated, through the South China Sea and the Strait of Malacca, and on across the Indian Ocean to Africa and the Red Sea—the gateway to the Suez Canal and Mediterranean ports on the southern coast of the European Union. China has already declared Greece the terminus of its new route to the West. Adjacent to the Black Sea, Greece provides a strategic link to connect the Maritime Road with the overland Economic Belt, a network of roads, rail lines and industrial facilities that China is building across Central Asia in an effort to boost prosperity in its western provinces and trade with Europe and Russia. The combined effort, announced in 2013, is known as the Belt and Road Initiative or One Belt, One Road.

For President Xi, the epic plan is not only a bet on China’s future, but also on his place in history. “The Maritime Silk Road is a powerful meme that can make Xi immortal,” said Marcel Saucy, a senior partner in Fincorp Finance S.A., a Zurich-based shipping investment firm.

A Top Priority

Xi has wasted no time elevating the Maritime Silk Road to a top national priority, marshaling the power, decision-making and financial control needed for implementation. He’s moving fast because the project underpins his bid to boost the country’s growth rate.

Not surprisingly, the cost of the project is high, especially for obtaining market access and political concessions to construct the ports, railways and other facilities in emerging markets, which face an $800-billion annual shortfall in infrastructure investment.

While the bill might be steep, China has deep pockets. Even after pumping cash into its stock market last year to bolster prices, the country has currency reserves of $3.5 trillion, said Patrick Chovanec, a former economics professor at Tsinghua University in Beijing. Now chief market strategist at Silvercrest Asset Management in New York, Chovanec earlier roamed the old Silk Road visiting China’s 31 provinces and autonomous and administrative regions. While Xi won’t spend all of China’s reserves on Silk Road projects, “there’s clearly a perception that China is handing out the goodies,” said Chovanec.

There’s plenty to go around. The $100-billion Asian Infrastructure Investment Bank, another China initiative that dates to 2013, is expected to prioritize Silk Road projects when it announces its first loans this spring, while the Silk Road Fund Co. Ltd., with an initial allocation of $40 billion, will provide venture-style seed investments. According to Fitch Ratings (Beijing), China has already committed $179 billion from its reserves to bolster Silk Road projects. China’s biggest commercial banks have also announced large lending targets.

While projects span the entire Silk Road, Africa has emerged as a key component. In early December 2015, Xi opened a summit with several dozen African leaders in Johannesburg with a big dose of holiday cheer—a package of interest-free loans, trade credits and preferential financing worth $60 billion. It was the first time the Forum on China-Africa Cooperation met in Africa since the group was established in 2000.

A month later, the East African nation of Djibouti became a critical junction in the Silk Road, signing agreements with China to establish a free-trade zone, increasing the country’s role as a hub for trade between China and the rest of the world and enabling Chinese banks to operate there. Beijing is also building a $4-billion railway that will connect Djibouti’s ports to the markets of its landlocked neighbor Ethiopia, one of the fastest-growing emerging economies.

The Greek Connection

Commercial shipping is at the heart of Xi’s plan to construct a maritime Silk Road. China is dependent on seaborne commerce for both its export success and its imports of energy, food and raw materials. The new road brings China to the front door of commercial ports and logistics facilities in most regions of the world.

In Europe, that means the Greek port of Piraeus, where China’s state-owned shipping company, COSCO, has established the road’s western terminus.

With 35-year concessions to manage two of Piraeus’ three docks, COSCO expanded Piraeus from a backwater to a major port, handling nearly 4 million containers in 2014; the European Union’s biggest port, Rotterdam in The Netherlands, handled 12 million containers. That made Piraeus the world’s fastest-growing container port for several years, and on a 2014 visit, Chinese Premier Li Keqiang declared Piraeus “China’s gateway to Europe.” In the past year, China and Greece have struck nearly 30 agreements on maritime infrastructure building, technology, transportation, ship-building and tourism. According to Wang Hong, head of China’s State Oceanic Administration, Greece is now “the European extension” of the Maritime Silk Road.

Major corporations are fast adapting to the new road. California-based HP Inc. now uses Piraeus as the main ocean-freight gateway for South, Central and Eastern Europe, as well as for Central Asia, North Africa and parts of the Middle East. HP computers, transported from the company’s plants in China on large container ships, are distributed from Piraeus on smaller vessels across the Mediterranean and Black seas. By not using ports in Northern Europe, HP saves considerable time and money. Other companies have followed HP’s lead; Sony, Huawei and ZTE also now use Piraeus as a hub, and Samsung may do the same.

Manufacturers and transport providers will ultimately need to weave new Silk Road facilities and routes into their networks, according to Kris Kosmala, a vice president at Quintiq Asia Pacific, the supply-chain optimization unit of France’s Dassault Systèmes. In a December post on Quintiq’s blog, Kosmala said supply-chain leaders are trying to determine what China “is going to construct, what will be the sequence of construction projects and what the overall network will consist of.” But, he added, the new Silk Road, on land and sea, “has the potential of changing the costs, yields and network optimization strategies” for essentially all companies that move goods between Chinese production centers and Western markets.

Challenges at Home

While President Xi is moving fast abroad, the slow pace of China’s transition to an economy driven more by consumer spending than industrial investment remains a challenge at home.

The new Silk Road provides some breathing room for that transition to take hold—it’s a unique opportunity to deploy excess industrial capacity outside China while at the same time expanding the reach of the country’s traditional export industries.

“The Chinese leadership is struggling to manage a difficult transition,” said the Washington-based Center for Strategic and International Studies in an overview of the new Silk Road published in 2015, noting that the project can “provide stimulus to help cushion the effects” of that shift.

As with any big bet, the Silk Road gamble comes with risks. For example, turning it into a one-way street to facilitate Chinese exports may backfire, said Chovanec, the market strategist at Silvercrest. Many countries along the route will welcome Chinese capital, but some may balk if constraining terms are part of the deal.

If President Xi manages to make the road pay off, however, the upside could be substantial not only for China but also for consumers and producers around the world.

Authors

  • Christopher R. O'Dea

    Contributor, Korn Ferry Institute